Is 'Not Guilty' the Same as 'Innocent'? Evidence from SEC Financial Fraud Investigations

56 Pages Posted: 19 Jun 2019 Last revised: 3 Aug 2020

See all articles by David H. Solomon

David H. Solomon

Boston College - Carroll School of Management

Eugene F. Soltes

Harvard University - Business School (HBS)

Date Written: June 12, 2019

Abstract

When the Securities and Exchange Commission (SEC) investigates firms for financial fraud, investors only learn about the investigation if managers disclose it, or regulators sanction the firm. We investigate the effects of such disclosures using confidential records on all investigations, regardless of outcome. Even when no charges are brought, firms that voluntarily disclose an investigation underperform non-disclosing firms by 11.7% over the following year. Disclosure is associated with a higher chance of shareholder class action lawsuits, and more prominent disclosures are associated with worse returns. CEOs who disclose an investigation are 14% more likely to experience turnover. Our results are consistent with transparency about bad news being punished by financial and labor markets.

Keywords: Fraud, Disclosure, SEC, Reputation, CEO Turnover

JEL Classification: G14, G34, G38, K22, K42

Suggested Citation

Solomon, David H. and Soltes, Eugene F., Is 'Not Guilty' the Same as 'Innocent'? Evidence from SEC Financial Fraud Investigations (June 12, 2019). Available at SSRN: https://ssrn.com/abstract=3402780 or http://dx.doi.org/10.2139/ssrn.3402780

David H. Solomon (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Eugene F. Soltes

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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